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Microsoft is spending $1.3bn more than previously announced to take on internet rivals Google and Yahoo!.

Says who? Says chief executive Steve Ballmer, who reportedly said Microsoft's R&D spend would hit $7.5bn for the current fiscal year 2007.

In May Microsoft said it would spend $6.2bn for FY'07, a budget that sent Wall Street into a flap, and shares marked down to a year low. Analysts had expected an R&D budget of $4bn and, gave the company a grilling at its annual summit held for them this summer. Such was the concern and debate prompted by the additional $2bn spend, Ballmer was forced to issue a company-wide "don't panic" memo to employees.

Microsoft can expect continued questions on R&D during the up-coming first-quarter conference call, as analysts will take the opportunity to probe executives on this latest increase.

Ballmer on Tuesday did not say where the increased R&D spend is going however executives have previously alluded to the need to refine Microsoft's ads serving platform. According to Ballmer, half a billion in R&D will be spent in Europe. ®